Obligations rated 'BBB' by S&P exhibits adequate protection parameters, but adverse economic conditions are more likely to weaken their capacity to meet financial commitments.
S&P Global Ratings has downgraded the outlook for Adani Electricity Mumbai (AEML) to negative from stable, mainly over apprehensions that the leverage levels of Adani Transmission (ATL), AEML’s holding company, will rise over the next two years as it undertakes significantly higher spending to grow its asset base.
The agency has retained ‘BBB-‘ credit rating on AEML. Obligations rated ‘BBB’ by S&P exhibits adequate protection parameters, but adverse economic conditions are more likely to weaken their capacity to meet financial commitments. AEML runs the power distribution business in Mumbai.
Over the next two years, S&P expects ATL’s leverage level (ratio between fund from operations and debt) to dip to 7% in FY22, before rising to 8.2% in FY23, as it sets to incur Rs 17,000-crore capital expenditure over the next three fiscals to complete several under-construction transmission projects. The company’s leverage level remained between 8% and 12% over the past two years. Earnings contribution from project commissioning is expected to drive leverage to above 9% from FY24.
“We believe AEML’s earnings will improve, backed by a pick-up in sales volumes in its power distribution business and an established regulatory framework that allows the company to recover revenue shortfall caused by materially weaker power sales volumes in FY21,” S&P said.
On the back of the upcoming tariff revision in November 2022 and rebound in power volumes, AEML’s leverage will likely increase to 10.5-12.5% over FY23 and FY24, from 2.7% in FY21. The leverage level is estimated to be 7.5% in FY22.
As in March end, AEML had cash, short-term investments and fixed deposits of around Rs 1,700 crore, and has recently issued senior secured bonds of $300 million under the company’s global medium-term note programme. Moody’s Investors Service has assigned ‘Baa3’ senior secured bond ratings to these notes, and the company will use the proceeds from the drawdown for refinancing, funding capital expenditure and general corporate purposes.